Saturday, January 24, 2009

Ballplayers and their Marginal Revenue Product

This post is in response to this thread going on at Tango Tiger's site, which is a response to some curious salary valuation by JC Bradbury. The summary is that Bradbury has come up with an economic model that says Jeff Francoeur, who used up 652 plate appearances for the Braves last year (and made 479 outs) was worth 12 million dollars. The voices on Tango's site are trying to convince him that the proper place for such a model is the porcelain bowl that sits in the smallest room of your house.

Let's suppose that you own a factory with some great automated processes that produce a great product. You can sell these products and make 25 million dollars per year. The only thing you need is workers to push a few buttons at specified times. It's a very simple job, practically anyone can be trained to do it, but for some reason it has to be done by humans, and you need 25 of them to do it. With no workers, you can't make any products, and your revenue will be zero.

Do you put an ad in the paper for 25 entry level positions paying near 1 million dollars? (a little less than $1M obviously to account for overhead).

I don't think so. You are going to just pay enough to attract reliable workers. Maybe a bit more if you are generous, since you are making so much money yourself, but you aren't going to give all of that to the workers. Most of the money is earned by the capital expenditure, the factory.

An MLB franchise is that money producing factory. To make a lot of money, you need a big, expensive stadium (while most of those are public expenitures, not from the owner's capital, that is another debate. The MLB owner benefits from it) You also need the tradition, the big city location, the national TV contracts, and all the benefits that come from being a part of the exclusive club of 30 teams that get to call themselves major league baseball.

Add to this mix 25 replacement level players, by our definition players who are between 15 and 30 runs worse than average over a full season, and you will make money. We are talking about a major league team that wins 40-50 games, a really bad team. The last team this bad was the 2003 Tigers, but even they were able to draw 1.3 million fans. Say this replacement level team makes 100 million dollars. Should the 25 replacement players be considered responsible for that revenue?

I don't think so, for two reasons:

1. They are by definition replaceable. There are many more players who are a step below average than there are above average or average players. There are hundreds of players in the minors who are just as capable of contributing to a 45 win team, and would jump at the chance to do so for the major league minimum.

2. These players, outside of the money making context that is major league baseball, could not come close to drawing 100 million dollars in revenue. A good AAA team would likely be as good as this 45 win major league team, but the difference in money is staggering. A few AAA teams have drawn 1 million fans, but even those teams do so with ticket prices that are a fraction of what MLB tickets cost.

This is why replacement level players do not add significantly to revenue in major league baseball, and why no team would ever pay them more than the league minimum. That is, as long as the team recognizes them as replacement level players, errors in judgement will always exist. Major league baseball is set up as a huge money maker as long as they can get minimally acceptable players to show up and play. They increase their revenue beyond this minimum by acquiring the good players, the rare talents that are average major leaguers and better. These are the players who earn, and receive, the rewards of the game.

34 Comments:

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I agree with you on principle that's JC's model is way way way off-base, though I'm not sure I buy that a team of openly replacement-level players could even generate what revenue the Tigers did in '03. Clearly the Tigers never intended to be that bad -- fans perhaps saw a good-faith (while grossly misguided) attempt to put a decent team on the field, and that kept them coming to the ballpark. Then you have the Marlins, who do essentially what you're saying (a team on minimum-salary players)... but they're not replacement-level players, and Florida always exceeds expectations and wins games, which brings fans out. I don't think MLB has seen, other than maybe the A's of the late 1970s, a concerted effort to put both cheap and untalented players on the field since the 1920s, when the economic environment was so different that comparing it to today is like apples and oranges. If today's fans ever caught wind of the fact that their hometown team's owner was deliberately putting 25 bad players on the field with no intention of winning, I don't know if they would be able to generate anywhere near the revenue of the '03 Tigers. If the team sucks, fans want the effort to be there, at the very least.

The last time a team deliberately tried to put 25 replacement level players on the field, Rick Vaughn, Willie Mays Hayes, and Jake Taylor led the Indians to a division title.

I think you're right, a deliberate effort would not draw as well as the Tigers, but they would still make a LOT more money than the same players would playing for a AAA team.

As a DC worker, I can tell you that despite a crappy team, there are other reasons fans come to the park. Sometimes they appreciate watching the talent that the visiting team brings. Sometimes they just like to watch baseball. They could draw a lot more if they had a competitive team, but do OK just having major league baseball.

I can also attest to the fact, being a KC fan and living in Baltimore, there are many seasons when it is obvious neither the O's nor the Royals make any effort to field a competitive team. Maybe not 25 replacement level players, but certainly their intentions are well known and the expectations are crap. Yet, despite dwindling attendance, the teams continue to make money. But I have to say, it is difficult to watch. Either way, a Major League team will almost always have value because corporate sponsorship is always there and always more expensive at the Major League level, there are always a core group of die hard fans and the opposing team fans contribute as well. In this era of have and have nots, it is clear that money is made regardless of the quality of the players on a given team.

I assume you are an actual person since you got through the word verification, though it looks like you're just cut and pasting here. I probably should just go ahead and delete your comment, but I'm a nice guy, so consider this fair warning.

The comments here are to talk about baseball. Not web site promotion. Future comments that do not address the subject - baseball - will be deleted.

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